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Life Health > Annuities > Variable Annuities

Regulators Draft Language for Hot New Annuities

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What You Need to Know

  • The NAIC's Actuarial Guideline for ILVAs could take effect in April 2023.
  • The change will create consistency among terms used in ILVA contract provisions.

Life insurers could start using a new language to build “index-linked variable annuities,” or ILVAs, as early as April 1, 2023.

The Index-Linked Variable Annuity Subgroup, an arm of the National Association of Insurance Commissioners, has been working on an Actuarial Guideline ILVA draft for more than a year.

Insurer groups seem to like what they’re seeing in the latest draft, including part of a provision that calls for the guideline to take effect this spring.

Representatives from the American Council of Life Insurers and the Committee of Annuity Insurers told the ILVA Subgroup in a recent comment letter that insurers will need more time to apply the new framework to existing annuity products.

But “we believe the April 1, 2023, effective date to be manageable for new filings initially submitted for approval on or after this effective date,” industry reps said.

What It Means

For clients and their advisors, the most visible effect of the new guideline could be that insurers start to move toward using the same terms for the same ILVA contract provisions and defining those terms in the same way.

In the long run, the guidelines could help clients understand how specific ILVA products might perform if they die early or simply take cash out early.

Products With Many Names

ILVAs are also known as buffer annuities, structured annuities and registered index-linked annuities. Life insurers have been selling the products since 2010.

The contracts have crediting rates tied to the performance of investment market indexes or ETFs.

Because issuers register the products as securities with the U.S. Securities and Exchange Commission the issuers can expose the buyers to the risk of loss of account value due to investment market performance.

The products are popular with life insurers because they can use relatively cheap, simple derivatives arrangements to provide the investment options and manage investment option risk, and they can use the basic product design and optional riders to provide as much or as little protection against loss of account value as they want to provide.

Regulators began developing the draft guideline because of concerns that, unlike a traditional variable annuity, the value of an ILVA contract before the term ending date is not tied to the market value of a specific value of stocks, bonds and investment funds, and ILVA market players have disagreed about how to calculate interim values, or even how to define the terms needed to talk about calculating interim values.

The ILVA Glossary

The current draft of the actuarial guideline defines 10 terms needed to talk about ILVA valuations.

Drafters have, for example, defined “index strategy” to mean “a method used to determine index credits with specified index or indices and cap, buffer, participation rate, spread, margin or other index crediting elements.”

The “index strategy term” is “the period of time from the term start date to the term end date over which an index changes and the index credit is determined.”

The term “interim value” means “the strategy value at any time other than the start date and end date of an index strategy term.”

Sticking Points

The reps from the ACLI and the Committee of Annuity Insurers said one concern is that the current draft appears to apply an interim “market value adjustment” only to ILVA contract partial withdrawals and ILVA contract surrenders

The industry reps said drafters should allow for market value adjustments in other situations, such as situations involving the death of the annuity holders, annuitization of ILVA contract assets or transfers of assets from an ILVA account to a traditional variable annuity investment option.

(Image: Prostock-studio/Adobe Stock)


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